External financing and economic activity in the euro area -- Why are bank loans special?

Aldasoro Iñaki,
Bank for International Settlements

Unger Robert ,
Deutsche Bundesbank

Using a BVAR identified with a mix of sign and zero restrictions, we show that a restrictive bank loan supply shock has a strong and persistent negative impact on real GDP and the GDP deflator even when flows of other sources of financing such as equity and debt securities act as a ``spare tire" and compensate for the reduction in bank loans. This finding seems to contradict the idea that bank loans are special because there is only a limited ability to substitute them with other sources of financing. We argue and show that our results can be rationalized by a recently revived view of banking, which holds that banks increase the nominal purchasing power of the economy when they create additional deposits in the act of lending. Consequently, our findings indicate that a substitution of bank loans by other sources of financing might have negative macroeconomic repercussions.